Cal. State Bar Formal Opn. No. 2013-187 — Third-Party Payor

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THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2013-187
ISSUE: Who is entitled to the refund of remaining advanced fees at the end of a case where fees
were paid by a non-client?
DIGEST: Where a third-party pays the attorney’s fees for a client and there are funds remaining
after the representation is concluded, the attorney must return the balance to the payor,
rather than to the client, unless the agreements with the client and the payor specify
otherwise.
AUTHORITIES
INTERPRETED: Rules 3-310(F), 3-700(D)(2), and 4-100 of the Rules of Professional Conduct of the State
Bar of California.1/
Code of Civil Procedure section 285.1.
Labor Code section 2802.
STATEMENT OF FACTS
Attorney is retained by Spouse to handle Spouse's dissolution of marriage. Spouse's Parent agrees to pay the
attorney’s fees on an hourly basis and the attorney’s costs, and advances a sum to the lawyer for that purpose. There
is no dispute that Attorney made all proper disclosures under rule 3-310(F), including “disclosure” under rule 3-
310(A)(1), and Spouse consented in writing after such disclosures. Spouse’s Parent also signed an agreement,
covering payment arrangements and her acknowledgement of the restrictions specified in rule 3-310(F). Neither
agreement addresses the disposition of any surplus funds at the end of the case. Upon termination of the
representation, Attorney files a Notice of Withdrawal pursuant to Code of Civil Procedure section 285.1.2/ Spouse
insists unused sums in the trust account be disbursed to her, while Spouse’s Parent asks for the money to be returned
to her.3/
DISCUSSION
There are several common circumstances in which a third-party may pay the attorney’s fees and/or costs for a party
to litigation or a transaction. For example, parents may pay the attorney for fees incurred on behalf of their adult
child in a domestic relations or criminal matter. Employers often pay the fees for an employee being sued, such as
pursuant to Labor Code section 2802.4/ Sometimes the attorney is representing both the employee and the employer.
1/ Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of
California.
2/ Code of Civil Procedure Section 285.1 reads: “An attorney of record for any party in any civil action or
proceeding for dissolution of marriage, . . . may withdraw at any time subsequent to the time when any judgment in
such action or proceeding, other than an interlocutory judgment, becomes final, and prior to service upon him of
pleadings or motion papers in any proceeding then pending in said cause, by filing a notice of withdrawal.”
3/ These facts assume that fees have been appropriately earned and paid and the only issue is with regard to
surplus funds.
4/ Labor Code section 2802 requires an employer to “indemnify his or her employee for all necessary expenditures
or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her

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In commercial lending transactions, the borrower sometimes pays the fees of the lender’s attorney.5/ In any such
case, rule 3-310(F)6/ sets forth that the third-party must not be allowed to interfere with the client-lawyer
relationship, or have access to confidential client information. Rule 3-310(F) does not answer the question of what
happens to surplus funds when the case ends.
Three state bar ethics committees have opined on this question. The Maryland State Bar Committee on Ethics said
in Opinion 2001-6: “absent agreement to the contrary, once the retainer check was made payable to you and
deposited in your escrow account as a retainer for your handling the representation, that you were accountable to
your client for those funds and not to the client’s mother.” They went on to say: “the only person who could
demand the return of any funds would be the client.” The North Carolina State Bar, in 2005 Formal Ethics Opinion
12, analyzed it this way: “The lawyer understands that the legal fees were paid by a third-party for the purpose of
Client’s representation. See ABA Model Rule 1.8(f). The unearned funds held in trust belong to the third-party, not
the client. In the event the payor wants the funds returned, Lawyer is obliged to do so.”7/ South Carolina Formal
Opinion 02-07 provides the fullest analysis of the issue. It states: “The present case may be reduced to the question
of which individual is ‘entitled to receive’ the funds at issue – client or his brother, the third-party payor. The
comments to ABA Model Rule 1.15 acknowledge that a third-party may have just claims against property in a
lawyer’s custody.… In addition, a lawyer must balance this duty to third parties with the duty of loyalty owed to his
client.” After analyzing ABA Model Rule 1.15 and its comments, the South Carolina Ethics Advisory Committee
concluded: “The lawyer should retain the disputed fees in trust until the parties reach an agreement resolving the
dispute or an appropriate court determines the rights of the parties.”
In California, rule 4-100(B)(4) requires an attorney to “[p]romptly pay or deliver, as requested by the client, any
funds . . . in the possession of the member which the client is entitled to receive.” [Emphasis added.] This raises the
question of whether the client is entitled to receive the money.
This Committee, in Cal. State Bar Formal Opn. No. 2008-175, concluded that rule 4-100(B)(4), although it refers to
the duty to deliver funds to the client, also includes the duty to deliver funds to a third-party who is entitled to
receive them. Rule 3-700(D)(2) requires an attorney, at the end of the matter, to “[p]romptly refund any part of a fee
[footnote continued…]
obedience to the directions of the employer….” This requires an employer to defend or indemnify an employee
who is sued by third persons for conduct in the course and scope of his employment. Douglas v. Los Angeles
Herald-Examiner (1975) 50 Cal.App.3d 449 [123 Cal.Rptr. 683].
5/ This opinion only addresses the situation where the paying party is not a party to the action. Also it does not
address payment by an insurer, payment by a parent for a minor child, or third-party financing of matters, where the
third-party is loaning money to the attorney or client, rather than paying the funds.
6/ Rule 3-310(F) states: A member shall not accept compensation for representing a client from one other than the
client unless:
(1) There is no interference with the member's independence of professional judgment or with the client-
lawyer relationship; and
(2) Information relating to representation of the client is protected as required by Business and Professions
Code section 6068, subdivision (e); and
(3) The member obtains the client's informed written consent, provided that no disclosure or consent is
required if:
(a) such nondisclosure is otherwise authorized by law; or
(b) the member is rendering legal services on behalf of any public agency which provides legal services to
other public agencies or the public.
7/ The ABA Model Rules are not binding in California but may be used for guidance by lawyers where there is no
direct California authority and the ABA Model Rules do not conflict with California policy. See State
Compensation Insurance Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, 655-656 [82 Cal.Rptr.2d 799].

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paid in advance that has not been earned.” [Emphasis added.] The rules do not define “refund.” The dictionary
defines it as “to return (money) in restitution, repayment, or balancing of accounts.”8/ [Emphasis added.] The
concept of a refund implies that the money is returned to its source, in this case the third-party payor. We conclude
that, absent a fee agreement with the payor spelling out the disposition of the surplus funds, the money should be
returned to the payor.
Under our hypothetical, the client asked that the balance in the trust account be paid to her. The California Supreme
Court discussed a similar issue in Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-156 [49 Cal.Rptr. 97]. The
court looked at what an attorney does when receiving funds in a settlement that are subject to a third-party lien. The
court held that the attorney receiving funds holds the funds as a fiduciary for that third-party. (“When an attorney
receives money on behalf of a third-party who is not his client, he nevertheless is a fiduciary as to such third-party.
Thus the funds in his possession are impressed with a trust, and his conversion of such funds is a breach of the
trust.” (Johnstone, at pp. 155-156.) See also In the Matter of Riley (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr.
91.) While both Johnstone and Riley dealt with medical liens, the issue here is similar—funds held by the lawyer
belonging to a third-party. Giving the funds to the third-party complies with this fiduciary duty, but violates the
express direction of the client.9/ The lawyer is faced with a quandary. If he delivers the funds to the client, he can
be held liable for a conversion. (Johnstone, at pp. 155-156.) If he gives the funds to the payor, he is violating the
direct instructions of his client. Under the facts of our hypothetical, we conclude that the third-party payor is
entitled to the funds, and therefore, the attorney has a fiduciary duty to advise the payor of the availability of the
funds and to turn them over to her.10/ Cal. State Bar Formal Opn. No. 2008-175 (“An attorney cannot follow a
client’s direction not to pay a lienholder from settlement proceeds because to do so would be a breach of the
attorney’s fiduciary duty to the lienholder.”). Since the funds in the account belong to the payor, the attorney cannot
give the money to the client.11/
The issue of who is entitled to the remaining amount can be avoided by the use of carefully drafted agreements with
the paying party and the client.
CONCLUSION
When an attorney receives payment for fees from a third-party payor, any refund of excess fees at the conclusion of
the case should be paid to the payor, unless the parties have contracted a different result.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of
California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Trustees,
any persons, or tribunals charged with regulatory responsibilities, or any member of the State Bar.
[Publisher’s Note: Internet resources cited in this opinion were last accessed by staff on March 4, 2013. A copy of
these resources is on file with the State Bar’s Office of Professional Competence.]
8/ See http://www.merriam-webster.com/dictionary/refund.
9/ Cf. Virtanen v O’Connell (2006) 140 Cal.App.4th 688 [44 Cal.Rptr.3d 702], where lawyer held property as
escrow holder and had duties both to his client and to the opposing party.
10/ To the extent the facts are such that the payor’s entitlement to the refund is less clear than under our
hypothetical facts, the lawyer may interplead the funds with the court in order to allow the court to make the
determination. In any event, it would not violate the lawyer’s ethical duties to interplead the funds under any factual
scenario in which he had a good faith basis for questioning the payor’s right to the surplus funds. Cal. State Bar
Formal Opn. 2008-175.
11/ The lawyer in this situation may have to face two additional issues: (1) what happens if the client requests that
the lawyer retain the money for further services after the completion of the agreed work or the payor requests the
refund before the work is completed, and (2) what happens if the payor questions the refund amount? This opinion
does not address these additional issues.

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